Compensation

Chapter 03
Defining Internal Alignment
©McGraw-Hill Education. All rights reserved.
Exhibit 1.5:
The Pay
Model
©McG
Compensation Strategy: Internal Alignment
Internal pay relationships form a pay structure that should:
• Support the organization strategy.
• Support the work flow.
• And motivate behavior toward organization objectives.

Internal alignment refers to the pay relationships among

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different jobs/skills/competencies within a single organization.
Pay structure refers to the array of pay rates for different work
or skills within a single organization.
• The number of levels, the differentials in pay between levels, and the
criteria used to determine those differences describe the structure.
©McG
Compensation Strategy
Supports organization strategy.
• Organization strategy supports and maintains competitive advantage.

Supports work flow.

• Work flow is the process of delivering products to the customers.
• Pay structure should support the efficient flow of work and
organizational design.

Motivates behavior.
• Internal pay structures are part of a network of returns.
• Design structures to engage employees in achieving objectives.
• There should be a “line-of-sight” relationship between each job and
the organization’s objectives.
• Employees should “see” links between their work, the work of others,
and the organization’s objectives.
©McG
Structures Vary Among Organizations
An internal pay structure can be defined by:
• The number of levels of work.
• The pay differentials between the levels.
• And the criteria or bases used to determine those levels and
differentials.

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©McG
Number of Levels and Differentials
One feature of any pay structure is its hierarchical nature.
• The number of levels and reporting relationships.
• VP – Director – Manager – Supervisor – Asst. Supervisor – Front Line

The pay differences among levels are called differentials.

• A compensation budget may be distributed in a number of ways.
• Divide it equally by the number of employees.
• Or, as most organizations do, vary pay among employees.
• One intention is to motivate people to strive for promotion to a higher-
paying level.
©McG
Criteria
Content
Refers to the work performed
and how it gets done.
A content based structure ranks
jobs based on:
• Skills required.
• Complexity of tasks.
• Problem solving.
• And, or, responsibility.
Value
Refers to the worth of the
work.
A value based structure focuses
on the relative contribution of:
• The skills, tasks, and
responsibilities of a job to the
organization’s goals.
External market value may be
included.
©McG
Use Value and Exchange Value
Use value reflects the value of goods or services an employee
produces in a job.
• Similar job content in two different companies may be
valued differently based on how it contributes to
organization objectives.
Exchange value is whatever wage the employer and employee
agree on for a job.
• The same work content in the same company may have
different exchange values based on different geographies.
The difference between exchange value and use value may
surface when one firm acquires another.
©McG
Job- and Person-Based Structures
A job-based structure relies on the work content
• Tasks
• Behaviors
• Responsibilities

A person-based structure shifts the focus to the employee – the

skills, knowledge, or competencies the employee possesses.
• In the real workplace, it is difficult to describe a job without reference
to the jobholder’s knowledge and skills.
• It is also difficult to define a person’s job-related knowledge without
referring to work content.
• So, rather than a job- or person-based structure, reality includes
both job and person.
©McG
External Factors Shaping Internal Structure
Economic pressures.
• Marginal productivity says employers pay use value.
• Both labor and product supply and demand affect pay structures.

Government policies, laws, and regulations.

• U.S. legislation forbids discrimination and some legislation aims at
differentials, producing a flatter wage rate structure.

External stakeholders.
• Unions, stockholders, and political groups have a stake in how internal
pay structures are determined.

Cultures and customs.

• Shared mind-sets may judge what size pay differential is fair.
©McG
Organization Factors Shaping Internal Structure
Misaligned pay structures may become obstacles to success.
Human capital.
• When skills and experience add value, more pay is commanded.

Work design.
• Technology, outsourcing and delayering are changing work design.

Overall HR policies. Loading…

• Most organizations tie money to promotions as motivation.
• Internal labor markets determine pay for jobs within the firm and
allocate employees among the different jobs.

Employee acceptance relies on two sources of fairness.

• Procedural justice.
• Distributive justice.
©McG
Pay Structures Change
Pay structures may change in response to external factors
such as skill shortages.

Earlier established pay structures may be maintained for cultural

or political reasons.

This “change-and congeal” process is not conducive to

continuous changes occurring in today’s economy.

New norms for employee acceptance need to recognize constant

change, even in internal pay structures.
©McG
Strategic Choices in Designing Internal
Aligned pay structures Structures

• support the way the work gets done,

• fit the organization’s business strategy, and are

• fair to employees.

Greater internal alignment is more likely to lead to success and

misaligned structures become obstacles.

Two strategic choices are involved in internally aligning pay

structures.
1. How to specifically tailor the organization design and work flow
to make the structure.
2. How to distribute pay throughout the levels in the structure.
©McG
Tailored versus Loosely Coupled
Tailored
A low-cost, customer-focused
strategy is supported by a
closely tailored structure.
Jobs are well-defined with
detailed tasks or steps.
Pay structures are well-
defined too.
Examples include McDonald’s
or Walmart.
Loosely Coupled
A strategy of innovation and
short cycle time is supported
by a loosely coupled structure.
Turbulent, unpredictable
competitive environment.
No steps are laid out and
employees may work on
several teams and products.
Pay structure is loosely linked
to the organization to provide
flexibility – example, 3M.
©McG
Pay Structures
Egalitarian structures have fewer levels and / or smaller
differentials.
Structures can also vary from layered to delayered.
• The layered structure is more hierarchical than the delayered structure
and less egalitarian in terms of number of levels.

Hierarchical pay structures have multiple levels, detailed work

descriptions, and outline who is responsible for what.
• In the delayered structure, several levels of jobs titles are removed.

Egalitarian structures are not problem-free.

• Equal treatment means high-performers feel underpaid.
• They may quit or change their behavior.
©McG
Exhibit 3.6: Hierarchical versus Egalitarian
Structures
©McG
Exhibit 3.7: Layered versus Delayered
Structures
©McG
Equity Theory: Fairness
This theory suggests EMPLOYEES judge the equity (fairness)
of their pay by making multiple comparisons.
• Comparing to jobs similar to their own (internal equity).
• Comparing their jobs to others at the same employer (internal equity).
• Comparing their jobs’ pay against external pay levels (external equity).

Comparison results depend on the accuracy of employee

knowledge of other’s jobs, internal structures, and external pay.
Equity theory could support either egalitarian or hierarchical
structures.
Equity theory says people compare the ratio of their own
outcomes to inputs with ratios of internals, externals and
themselves in a past or future situation.
©McG
Tournament Theory: Motivation and
Performance
This theory says all players play better when the prize differentials
are larger.
• Applying this to organization structures, the bigger the prize for getting
to the next level of structure, the greater the motivation.

Differentiation and dispersion in teams.

• Team sports depend both on individual performance and team effort.
• Teams with identical salaries outperformed those with big differentials.
• Egalitarian structures had a sizeable effect on individual’s performance.
• When task interdependence and discretionary cooperative behavior is
required – teams with differentiated salaries did better.
• Larger differentials based on performance generated positive sorting
effects.
©McG
Institutional Theory: Copy Others and Conform
Internal pay structures may become “best practice” and are
simply copied or imitated from others.

Recent examples include outsourcing jobs, emphasizing teams,

de-emphasizing individual contributions, and shifting to a
competency-based pay system.

Institutional theory predicts that very few firms are “first movers”
but instead copy innovative practices from others.

The potential drawback of such behavior is that what aligns with

the strategy of one organization may not align with another.

Also, it is not possible to outperform competitors simply by

imitating their practices.
©McG
Guidance from the Evidence
The impact of internal structures depends on the context in which
they operate.
• Hierarchical structures show greater performance when the work flow
depends on individual contributors.
• High performers quit less under hierarchical systems than those systems
based on performance rather than seniority.
• More egalitarian structures perform better when close collaboration and
sharing of knowledge is required.
• The impact of any internal structure on organization performance is
affected by the other dimensions of the pay model.
• Pay levels (competitiveness).
• Employee performance (contributions).
• Employee knowledge of the pay structure (management).
©McG
Exhibit 3.10: Some Consequences of an
Internally Aligned Structure
©McG
Consequences of Structures
Efficiency.
• Aligned structure leads to better organization performance.
• Internal pay structures imply future returns.
• The levels and titles may be rewarding beyond the pay.

Fairness.
• One group argues unfair differentials leads to employee dissatisfaction.
• Others argue small differentials increase cooperation and commitment.

Compliance.
• As with any pay decision, internal pay structures must comply with the
regulations of the country in which the organization operates.
©McG
Exhibit 1.5:
The Pay
Model
Compensation
Chapter 04
Job Analysis
©McGraw-Hill Education. All rights reserved.
Job Analysis
Job analysis is the systematic method of discovering and
describing differences and similarities among jobs.
Two products result from job analysis.
• A job description is the list of tasks, duties, and responsibilities that
make up a job – observable actions.
• A job specification is the list of knowledge, skills, abilities, and other
characteristics necessary to perform the job.

Two Structures:
• Job Based Structure (CH 5)
• Person Based Structure (CH 6)
©McG
Structures Based on Jobs, People, or Both
The process begins by:
• looking at people at work
• relative to the job they are performing.
• Job-based structures look at what people are doing and the
expected outcomes.
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Skill and Competency-based structures look at the person.
The underlying purpose remains the same for both.
• Collect and summarize work content information that identifies
similarities and differences.
• Determine what to value.
• Assess the relative value.
• Translate the relative value into an internal structure.
©McG
Job Based Approach: Most Common
Job analysis provides the underlying information and identifies the
content of the job, leading ultimately to an internal structure.
• This content is input for job descriptions, job evaluation, and hierarchical
job structure.

Major decisions in designing a job analysis.

• WHY are we performing job analysis?
• WHAT INFORMATION do we need?
• HOW should we collect it?
• WHO should be involved?
• HOW USEFUL ARE THE RESULTS?
©McG
Exhibit 4.3: Determining the Internal Job
Structure

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©McG
Why Perform Job Analysis?
Nearly every HR function uses job analysis.
An internal structure based on job-related information provides a
work-related rationale for pay differences.
Employees who understand the rationale can see where their
work fits into the bigger picture.
• It can direct their behavior toward organization objectives.

In compensation, job analysis has two critical uses.

• It establishes similarities and differences in the work content of the
jobs.
• It helps establish an internally fair and aligned job structure.

The key issue is to ensure the data is useful and acceptable.

©McG
Job Analysis Procedures
Job analysis collects information about specific tasks or
behaviors.
• A group of tasks performed by one person makes up a position.
• Identical positions make up a job.
• Broadly similar jobs combine into a job family.

The U.S. government developed a step-by-step approach to

conducting conventional job analysis.
• Develop preliminary information.
• Interview jobholders and supervisors.
• Use the information to create and verify job descriptions.
©McG
Exhibit 4.4: Job Analysis Terminology
©McG
Job Analysis - What Information Should Be
Collected?
Start by reviewing information already collected to develop a
framework for further analysis.
• Job titles, major duties, task dimensions and work-flow information
may already exist.
• However, it may no longer be accurate so verify existing information.

Collect sufficient information to adequately identify, define, and

describe a job.
Categorize information by:
• The job – job identification and job content.
• The employee – characteristics and both internal and external
relationships.
©McG
Exhibit 4.6: Typical Data Collected for Job
Analysis
©McG
Job Data: Identification and Content
Identification includes:
• Job titles, departments, the number of people who hold the job and
whether it is exempt from the Fair Labor Standards Act.

Job content is the heart of job analysis.

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• Data involves the elemental tasks or units of work, with emphasis on
the purpose of each task.
• There is also an emphasis on the objective of the task.
• Task data reveals the actual work performed and its purpose or
outcome.
©McG
Employee Data
Describe each factor of employee characteristics, and their
relationships, and rate each for its importance to the job.
The Position Analysis Questionnaire (PAQ), groups work
information into seven basic factors and includes 194 items.
A more nuanced view focuses on the nature of interactions.
• Interactions are the knowledge and behaviors involved in searching,
monitoring, and coordinating required to do the work.
• Some interactions are transactional, or routine, and some more tacit, or
complex and ambiguous.
• Tacit interactions are believed to add greater value than transactional
tasks.
©McG
Essential Elements and the ADA
The Americans with Disabilities Act (ADA) requires the
essential elements of a job be specified.
• Essential elements are those that cannot be reassigned to other
workers.
• If an applicant can perform the essential elements, the applicant can
perform the job.
• Reasonable accommodations must be made to enable qualified
persons to perform those elements.
• The law does not make allowances for special pay rates or special
benefits.
©McG
Level of Analysis
The level at which analysis of a job begins influences whether the
work is similar or different.
If job data suggest the jobs are similar, pay the jobs equally.
• If jobs are different, the pay can differ.

Using broad descriptions closer to the job-family level increases

flexibility.
• Employees can switch tasks without job transfer requests and wage
adjustments. ((MCP Medical Records Clerk)

A countering view is that a promotion to a new job title is part

of the organization’s network of returns.
• Reducing the number of titles reduces opportunities for promotion.
©McG
How Can the Information Be Collected?
Conventional methods are:
• Questionnaires
• Interviews
• observation
• EMPLOYEE INVOLVEMENT INCREASES THEIR UNDERSTANDING
OF THE PROCESS, HOWEVER, THE RESULTS ARE ONLY AS
GOOD AS THE PEOPLE INVOLVED.

Quantitative methods move the questionnaire online for a

quantitative job analysis (QJA) – statistical analysis is possible.
• Jobholders assess each item as to its importance to their job.
• Questions are grouped around five factors, and subcategorized.
• Results help prepare a job profile based on compensable factors.
• They can be tailored to the needs of the organization.

If important job aspects are omitted or importance is

unrecognized, the resulting job descriptions will be faulty.
©McG
Who Collects and Who Provides the Information?
Analysis is best done by someone trained for such analysis and
thoroughly familiar with the organization and its jobs.

The decision on the source of the data hinges on ensuring

consistent, accurate, useful, and acceptable data.
• Principal sources are the jobholders and supervisors.
• Managers two levels above give a valuable strategic view of jobs.
• Sometimes, subordinates or other employees that interact with the job
may be included. (360 REVIEW)
©McG
What about Discrepancies?

Differences in job data may arise among the jobholders.

If employees and supervisors disagree on what is part of the

job, the manager should collect more data.
Holding a focus group to discuss discrepancies, and asking
participants to sign off on the revised results ensures agreement.
Disagreements can help clarify expectations, learn better ways to
do the job, and document how the job is performed.

Support of top management and union officials is essential.

©McG
Job Descriptions Summarize the Data

The summary of the job itself is the job description.

• Job specifications can be used for hiring.

It may be useful to refer to generic job descriptions that can be

tailored to a specific organization.
• Good Starting Point

Managerial or professional job descriptions often have detailed

information on the job, its scope, and accountability.
• They capture the relationship between the job, the person performing it,
and the organizational objectives.

The final step in the job analysis is to verify the accuracy of the
resulting job description.
©McG
Job Analysis: Bedrock or Bureaucracy?
Disagreement centers on the issue of flexibility.
• Organizations are using fewer employees to do a wider variety of
tasks in order to increase productivity and reduce costs.
• Reducing jobs and cross-training can make work more fluid and
employees more flexible.

Generic job descriptions can increase flexibility but decreases

the targeted focus of employee outcomes/successes.
Traditional job analysis may reinforce rigidity.
• In some organization, analyzing work content is now
conducted as part of work flow and supply chain analysis.
• At Children’s, we had the managers review the job descriptions with
their employees during the ANNUAL REVIEW PROCESS.
©McG
Job Analysis and Globalization
Offshoring is the movement of jobs beyond a country’s borders.
• Hourly compensation differ across countries.
• There are productivity differences across countries as well.
• Availability of qualified workers and proximity to customers are issues.
• Both low-skill jobs and white-collar jobs are at risk for offshoring.

As firms spread work across multiple countries, there is a need to:

• Analyze jobs to maintain consistent job content or to measure the ways
jobs are similar or different.
• One challenge is that norms or perceptions of what is or is not part of a
particular job may vary across countries.
©McG
Judging Job Analysis – Reliability
Reliability is a measure of the consistency of results among
various analysts, methods, sources of data, or over time.
• A necessary, but not sufficient, condition for validity.

• Using multiple raters and average ratings increases reliability.

• Outcome of a job analysis depends greatly on who conducts it.
• Research on employee and supervisor agreement on the
reliability of job analysis information is mixed.
To increase reliability is to understand and reduce differences.
• Quantitative job analysis helps.
• Take care not to eliminate rich responses while eliminating differences.
• Training can improve reliability.
©McG
Judging Job Analysis – Validity and
Acceptability
Validity examines the agreement of results among sources and
methods.
• If several job holders, supervisors, and peers respond in similar ways, the
information is likely valid.
• A sign-off on results does not guarantee validity.

If job holders and managers are dissatisfied with the process,

they will likely not buy in to or trust the resulting job structure or
pay rates.
• Analysts collecting information through interviews and observation are
not always accepted due to the potential for bias.
• Quantitative approaches may not be accepted if they collect too much
information for too many purposes.
©McG
Judging Job Analysis – Currency and Usefulness
Currency-To be valid, acceptable, and useful, job information
must be up to date.
• Out-of-date job information hinders not only pay practices and
decision-making, but also hiring, training, and development.

Develop a systematic protocol for evaluating when job

information needs updated.
Usefulness refers to the practicality of the information collected.
• Job analysis provides information to help determine how much to pay
for a job and whether the job is similar or different from other jobs.
• If done in a reliable, valid, acceptable way, job analysis can be used to
make pay decision and is therefore useful.
• Multiple purposes may require more information than required for pay
decisions.
©McG
Exhibit 4.16: Updated Job Descriptions
©McG
Judging Job Analysis – A Judgment Call
In the face of all the difficulties, managers bother with job
analysis for the information needed to determine pay.
• Differences in work determine differences in pay.

If work information is required, the issue becomes how much

detail is needed to make these pay decisions.
• Collect enough information to:
• Help set individual employees’ pay.
• Encourage continuous learning.
• Increase the experience and skill of the work force.
• Minimize the risk of pay-related grievances.
• The response to inadequate analysis is to collect more useful analysis.